Homebuilder Stocks Going Parabolic

Homebuilder sentiment is strong. Single-family housing starts are rising. Home prices remain elevated.

On January 15, we learned that the National Association of Home Builders (NAHB) Housing Market Index slipped a point to 75 in January. The latest two readings have been the highest since July 1999. The NAHB said that low mortgage rates in a healthy labor market is increasing the need for additional inventory for single-family homes.

On January 16, we learned that housing starts for December soared by 16.9% to a 13-year high. Single-family starts were up 11.2% to a seasonally adjusted rate of 1.055 million units, the highest since June 2007.

I worry about the sustainability of the housing market given the wide gap between single-family starts in red and the Housing Market Index in blue. In a strong housing market starts were above the index. Now they lag the index by a large margin. This questions sustainability.

The S&P CoreLogic Case-Shiller Indices shows an inflated bubble for home prices.

The 20-city composite declined by 35.1% from its July 2006 peak to its March 2012 trough. Since this low, this index rose by 62.9% to a higher high in October 2019. This reading is 5.8% above the prior high.

Now the homebuilder stocks have rallied far too fast.

D.R. Horton (DHI) is above its annual pivot at $58.05 so the upside should stall with a decline back to this level as a magnet.

KB Home (KBH) is above its annual and semiannual pivots at $37.36 and $38.24 so the upside should stall with a decline back to these levels as magnets.

Lennar (LEN) is below its annual risky level at $75.17. There’s risk to its semiannual value level at $53.00.

PulteGroup (PHM) is below its annual risky level at $45.47. There’s risk to its semiannual pivot at $39.87.

Toll Brothers (TOL) is below its annual risky level at $52.44. There’s risk to its semiannual pivot at $40.26.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the last nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

Want to learn how to integrate trading levels into your every day trading strategy? Check out my new publication, 2-Second Trader.

This post first appeared on Forbes.com. To see the original, click here.